Tuesday, July 8, 2008

State of the Market - 7/8/08

Sharply lower oil prices and more assurances from Big Ben of free money for struggling banks was not enough to rally Wall Street this morning, as futures were down pre-market and stocks opened lower to start trading today. They quickly rallied for the first 10 minutes, however, right up to the highs of the late bounce from yesterday. That area proved to be temporary resistance, and the market fell for the next hour, touching the opening lows around 10:45. They could not break through those lows, and then bounced back up into the lunch hour. After pulling back a bit when first hitting the morning highs and forming what looked like an intraday cup with handle, the indices brokeout around 12:20, with the Nasdaq leading the way. The bulls could not hold onto the breakout once again, and stocks fell back going into the afternoon. They got a little support around 2:00, but that bullish cup with handle turned into a bearish head and shoulders pattern in the afternoon. That turned out to be nothing, as stocks broke to new highs around 2:40 and kept going from there. The market finished right near its highs for the day, with the Nasdaq and Small Caps leading the way with 2% gains.

Technically, the bounce we had today was certainly overdue and not unexpected, but we still haven't had a washout day with heavy and panicky selling. Because of that, I will stick by my guns and say that a good, intermediate-term bottom won't happen until we get something capitulation. It can happen(anything can happen), but I just don't think it will. My main Market Monitor ratio has still not hit the extreme level that tells me the market is ready to take a major turn. Therefore, I am still looking at levels where a bounce for the major indices might reverse. Short-term, we are pretty much right at some resistance levels - 11,400 (and maybe up to 11,635) on the Dow, 1275 on the S&P, and 2290 (and maybe up to 2310) on the Nasdaq. I wouldn't be surprised for the market to reverse any opening gains tomorrow, but it is entirely possible that the market moves a little higher than these levels being as oversold as it is. I'll put these charts up tonight showing where this resistance is. As of now, I don't expect us to move much higher than where we got today, but we'll see what happens.

I covered my entire VMW short this morning at $39.76 for a 27.6% gain - glad I added to it yesterday. Sometimes you are lucky in trading and today was one of those days - they announced a management change and that caused it to gap down 20%. Crazy stuff. I did not follow my sell rules here (covering only half) because I had such a big gain, and the market is so oversold. I probably should have held onto a little of it. I will look to reshort this on a bounce, although this also goes against one of the other lessons I talked about trying to not catch every swing. I tried to short GMXR this morning around $72.50, but Scottrade could not find enough shares to borrow so that didn't work. I decided to take a small short in FCSX at $29.45 as it was forming a bearish flag and the stop loss was quite clear and quite close, so I thought it was worth the risk. I was stopped out a little while later as it got above $30 for a 2% loss. No big deal, but I probably should have waited until the end of the day before initiating it. Glad I used a stop loss though based on how it closed.

Unfortunately, the commodity stocks I talked about last night did not bounce (at least not early and not enough yet) and I decided not to chase them to the downside. That was a good decision when I saw what happened in the afternoon. I just can't do that right now - as the afternoon demonstrated, they can bounce at any point and I don't want to get caught in a whipsaw. I still think these are definitely done and any bounces that we get(which I would imagine will still be quite sharp and probably have started today) are just opportunities to short in my opinion. Keep an eye on the charts I posted last night for some ideas if you are looking for some.

When the afternoon bounce started, I was tempted to buy a few things (I was mainly looking at EAC and MEE) as short-term swing trades, but I decided not to and instead will just wait for the bounce to play out. Buying dips is not a strength of mine, and I have no idea how long this bounce will last. I have a feeling a lot of these dip buyers are going to be disappointed once again, but maybe this one will stick and they can make some nice money in a short period of time. Right now, I am still in my full SOHU and HK shorts, as both acted OK today, especially SOHU. I am pretty sure HK is going to bounce here and I may lose some paper gains, but I am willing to take the chance that it has a lot more room to fall on the downside. I may even add to the position on the bounce.

I just wasn't very impressed with the "bounce" I guess - that's why I stayed on the sideline. By my calculations, the USO (representing crude prices) is down almost 6% in the last three days. Crude has been a killer to this market, so I figured a major pullback in oil would give the markets impetus to put in a major rally, especially with how oversold we are. On the contrary, the Nasdaq, from its intraday lows Monday to today's close, was able to move only 4%. That's not bad, but the Dow and S&P were less than that and I figured such a beatdown market could do better, especially with such a catalyst of lower oil prices. By the way, the USO has pulled back to a four-month trendline and is at the bottom of a channel, so it looks due to bounce. If it does, I would guess the market moves as well, except in the opposite direction. If oil breaks down through this trendline, then maybe the market will bounce a little longer than I expect.

We'll see what tomorrow brings - the bounce callers were right for a day and perhaps it will last longer than a few hours or a few days. However, we've seen this before (July 1st, when the Nasdaq rallied 35 points off its lows) and the market has quickly sold off the bounces. Right now, I am holding tight on my shorts and getting cash ready to add more shorts in the commodity sectors. I will keep my stop loss levels on the positions I have to protect myself in case we do rally more, but I think it is worth holding onto good positions right now. I don't plan on buying any of these dips here, and I would be careful doing so. If you do, make sure you have profit targets in mind and take the profits when you get them, even if they are small. Best of luck Wednesday.


Sebi said...

I think like you, that the indices will not rise to much until they will fall again.

If you look at ISE-Put-Call-Ratio:
All Securities: Calls 1948756; Puts 585744;
All Equities only: Calls 1629836; Puts 353122

there is no capitulation, if there are so many people who buy calls.

Mac said...

There definitely has not been any capitulation in this leg down. There were a lot of bullish reversals on charts, so it is possible this bounce lasts longer than I think. We'll see what happens.

Thanks for the comment.